Newsletter – Week 15 2024 – Inflation still sticky

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Market watch:

Middle East tensions and the fear that inflation may return to the US continue to impact on markets across the world.  The fear is that Iran is going to be drawn into the conflict – leading traders to dump stocks in favour of Treasury Bills (bonds), gold and the dollar. The DXY is climbing back up again and is at 106.1. The Dow is on the biggest losing streak since June last year. This week I have put the UK FTSE graph, which is showing a much closer trajectory to ours. 

The DJT (Truth Social) stock that we spoke about last week is now trading down at the $30 range, so ordinary investors have lost half of their investment since the IPO (amounting to at least $1.1bn – nice little transfer of wealth going on here from MAGA to DJT), but The Donald is still set to make $1bn in a bonus. The stock cost him almost nothing, and, of course, without him the platform is also worth nothing.  The bonus will be paid out in shares (so perhaps in 6 months’ time they will be at more realistic valuations – especially if he loses). Theoretically, when he loses in November, he could run again in 2028 – giving him another 4 years to continue to destroy the Republican Party.


While we might expect that Europe would make interest rate decisions independently, there is no doubt that they are heavily influenced by what the FED does. With US inflation remaining sticky (Oil is the underlying problem) it is now less likely that the ECB will cut rates next month. It has only ‘front-run’ the FED on 3 occasions in recent history.

China and the East

The Chinese economy is still in trouble, and as the main driver of commodity prices (which impacts our economy) this is not good news. China’s export growth tumbled in March compared to last year, sparking questions about a possible yuan devaluation at a time when China’s biggest mercantilist competitor in Asia – Japan – has intentionally depreciated its currency. 

Yen/Dollar exchange rate

Chinese Exports declined by 7.5% from a year earlier in March and was in sharp contrast to the 7.1% growth in combined figures for January and February. It was dragged down due to a higher base (the base effect we talk about often in this newsletter) in the same period last year, when China reported robust growth of 14.8% y-o-y growth?.

Imports also slumped, sliding -1.9% y-o-y in March. The only region where there has been an increase in exports is the ASEAN block. It is interesting to see where the changes in exports are coming from for the month. Notably, cell phone exports have dropped dramatically, but car exports are way up. 

In a quid pro quo move, Beijing is planning to eliminate American-made semiconductor chips from Chinese telecommunications systems by 2027. This strategy is expected to impact US chip manufacturers such as Intel and Advanced Micro Devices.  

Beijing’s move to eliminate American chips from its telecommunications systems comes amid a worsening tech war with Washington. In the US, lawmakers on Capitol Hill have banned Chinese chips from telecom equipment over national security risks and have restricted AMD and Nvidia from selling advanced chips to China. 

The fight for allies is on, especially in the ASEAN region, and increasingly they are being forced to pick sides. The Graph below show the trend at the moment, with the biggest change coming from Malaysia and Indonesia – moving more pro-Chinese.




In an interesting development, In Vietnam a death penalty has been passed for a white-collar crime. Vietnamese real estate tycoon Truong My Lan was sentenced to death in the country’s largest financial fraud case ever (and is also one of the largest frauds globally. The 67-year-old chair of the real estate company (Van Thinh Phat) was formally charged with fraud amounting to $12.5 billion, or nearly 3% of the country’s 2022 GDP.

Money, Gold Standard, Debt, Credit, Global Trade and how they’re all linked 

We all think that we understand what trade and credit is – but do we really?

Let’s start with credit, (a great  book by David Graeber, Debt: The First 5,000 Years will give you much more detail), has been an integral component of monetary arrangements since the dawn of civilization. Understanding the history is interesting, especially with all the talk of Zimbabwe moving back to the gold standard. 

Going back centuries, taxes needed to be paid and seed purchased for the next crop, and so credit in some form–notched sticks, bills of sale, purchase orders, loans–is the lifeblood of commerce and state revenues. Credit naturally divides into short-term commercial credit–credit extended until the goods or payment are delivered and longer-term credit secured by collateral.

In traditional economies in which gold and silver are money, credit was generally limited to commerce, as credit based on loaning surpluses of gold and silver was limited by the scarcity of those metals. But the demand for credit did not diminish; rather, it increased, which is why small banks (that often went bust) emerged in the 1820s in America to meet the demand from small enterprises for credit to expand.
In an economy in which gold is the only money, credit is limited to a percentage of gold held in reserves, as much of the reserves must be held to fund customer redemptions / withdrawals. This limits the availability of credit.

Since countries went off the gold standard, most of us now live in a “fractional reserve banking system”  and, one ounce of gold held in reserve is sufficient collateral for a loan 10 times the value of the reserve: $2,300 in gold enables the issuance of $23,000 in new money, i.e. a loan of $23,000, as every loan is new money created by the act of issuance.

What happens to “gold-backed money” when credit expands the supply of money expands 10-fold? The gold reserves are now spread over a much larger sums of money. The actual value of the gold backing each unit of money declines to a fraction of its initial value.

In other words, if credit is allowed to create money, then the “gold-backed” valuation of each unit is massively diluted. If credit is limited to surplus gold/silver loaned at interest, the sum of credit is a tiny fraction of all money in circulation.   This is the main reason why the world moved away from having currencies backed by gold.

Let’s look back in history and see what lessons can be learned.

In ancient Rome only gold-silver were money. When the empire’s silver mines in Spain were depleted, the supply of new money dried up and scarcity forced authorities to shave the actual silver content of coinage, the older higher-value coinage was quickly hoarded and left circulation: this is Gresham’s law, that bad money drives good money out of circulation (interestingly this is probably happening as we speak with the Zimbabwe ZiG – see below).

Rome also offers an example of trade’s impact on money that is relevant to the West moving off the Gold standard. Rome’s wealthy–who naturally ended up with most of the empire’s “sound money” wealth–spent freely on luxuries from foreign trade with Africa, India and distant China: silks, incense, gemstones, etc. This trade drained the empire of gold and silver, which was transferred overseas to buy the luxuries. In other words, trade imbalances drain importers of their gold/silver. 

President Nixon didn’t end the convertibility of the US dollar to gold on a whim; due to rising US trade deficits, America’s gold would have been drained to zero in a few years. That’s what happens to “sound money” when trade deficits cannot be controlled: those running the trade deficits run out of gold-silver and cease importing goods. Nixon’s hand was forced by the requirements of a global reserve currency, the US dollar. What is often overlooked in discussions of money is the necessity for reserve currencies to be “exported” to the global economy at scale so there’s enough units floating around to fund commerce and credit. If there is insufficient currency available in the global system, the currency cannot function as a reserve currency due to its scarcity. As the global economy increased in size, the sums of US dollars required also increased, requiring permanent trade deficits as the means to “export” the currency into the global financial system. The job of international settlements is thus done by the EuroDollar market. This wont easily be unseated by countries who wish to compete with the US as it has become the default for international trade.  

Many feel that getting rid of the USD’s reserve status would be a plus, but those mercantilist nations exporting to the US would disagree, as once trade dries up their gravy train ends. Also unsaid is the reality that many nations must import food and energy, and their trade deficits are thus unavoidable. A global economy with severely limited credit and trade will be a very different economy than the one we have now, undoubtedly better in terms of reduced consumption but this may not be entirely welcome or usher in an era of stability. The ideal system would be one that enables a transition to a new global economy that doesn’t impoverish the bottom 90% but then most of these ills are due to local politics and mismanagement rather than the Dollar. Interestingly, convertibility to gold didn’t restrain the ravages of inflation. Look at the chart of the USD’s purchasing power since 1900 and note the value dropped from $25 to $5 during the period that the USD was convertible to gold.

The larger point is the purchasing power and price of everything is set by global markets: the relative value of precious metals, currencies, commodities, labor, risk, credit–all are set by global markets. Any nation-state which presumes to anchor a price that suits its policy makers only creates a black market for whatever they are attempting to control.

Borrowing money into existence (which is what the US has been doing for decades) by selling Treasury bonds serves to limit the collapse of currencies, but it imposes interest payments (mostly paid to the wealthy who own 90% of the nation’s financial wealth) which drain the economy of vitality, leading to stagflation/decline. This very problem is something the US will need to deal with if they cannot ensure that their GDP grows in excess of their debt repayment rates. We need to start thinking outside the current system, which has no solutions: debt-free money leads to billion-dollar bills (look at the price escalation of Bitcoin), “sound money” (gold or bitcoin, it doesn’t matter) ends up in the hands of the wealthy and borrowing money into existence leads to stagnation as soaring interest sucks the economy dry. (I told you it wasn’t simple).

Zimbabwe’s ZiG and the gold standard.

In an interesting development  the ZIG currency rose 0.2% to 13.50 to the dollar last week. That brings the new unit’s cumulative gain since it started trading earlier last week to 0.4%. It’s a marked departure so far from its predecessor, the Zimbabwe dollar, which had lost value every single trading day of this year until its abandonment on Friday 5th April. The ZiG — short for Zimbabwe gold — is backed by 2 522 kilograms (88 960 ounces) of gold and about $100 million in foreign-currency reserves held by the central bank. It’s Zimbabwe’s sixth attempt at creating a currency since 2008.Authorities have linked the ZiG (an abbreviation for Zimbabwe Gold) to the price of gold in an attempt to reduce volatility. A single ZiG is worth about 7 US cents, the price of a milligram of gold. Still, central bank Governor John Mushayavanhu on Friday denied that the southern African nation is returning to the gold standard.

Most retail outlets are accepting payment in dollars for day-to-day transactions. Government departments have had to halt some services as they wait for lenders to complete the currency switch. Utility providers including the Zimbabwe Electricity Supply Authority have asked the public to settle bills in US dollars until local-currency payment services are restored. Is this going to solve Zim’s currency problems or is it destined to end up on the Zim currency scrap heap like dozens of other schemes? US Dollarisation worked – this is frankly just a vanity project. 


Mixed Signals

US CPI surprised on the upside last week after it was recorded at 3.5% y-o-y. It accelerated by 0.4% against the consensus monthly increase of 0.3%. In a similar fashion PPI accelerated to 2.1% y-o-y from 1.6% in February. Much of this has markets worried that inflation will once again rear its head. The below table indicates which sectors are adding to inflation on a y-o-y basis:

The bond market immediately reacted to this news with the US 10-year trading from a yield of 4.35% to above 4.50%. The yield curve is in essence flat with 2-year yields providing a yield just slightly ahead of its 30-year counterparty. This is not a normal yield curve and the acceleration in the business cycle and the affirmation that inflation may also now move higher has analysts wondering if 2024 really will hold the magnitude of interest rate cuts they were hoping for. I have maintained that inflation may very well stay structurally higher over time due to geopolitical changes, but this in theory should still allow for some reduction in rates. Equity markets reacted as they should selling down on the news.

The signals continue to be very mixed. Bonds are telling us that more rate hikes are coming whereas Gold’s price is synonymous with interest rate cuts. Stocks look like they may be worried that a soft landing is disappearing, and oil may be showing that the FED avoided a recession.

So if you can make sense of the signals then you are on step ahead of the investment markets at this stage of 2024. What I have found helpful is to look through the short-term noise and look 12 months out to what I think could be a reasonable environment. We know that the yield curve is shifting all the time as one of the largest maturities of bonds are happening in the US over the next year or so. So the yield curve and its shape will be influenced by all of this.

Secondly rates should decrease but the magnitude of these is anyone’s guess. If these catch the market by surprise expect equities to celebrate the news. The business-cycle is turning and this should allow for earnings to follow suit. One may have to wait as the rise in the business-cycle spills over into reportable earnings but ultimately this should allow for equities to move higher.

There is also the liquidity tightrope the US treasury and FED is walking at the moment. Too little liquidity and markets suffer, and the reverse is also possible where too much liquidity creates market excesses. For the second quarter the levelling off, of liquidity provisions coupled with tax receipts will cause equities to show their volatility. But for long term investors this could very well be an entry point into those assets one really wants to own. But switching off the fear mongers and listening to valuations will become very important. This is the reason why there are professional money managers.  

Author – Cobie Legrange


The dollar was up sharply at 106.1. 

The DXY Index:

The Rand/Dollar closed up at R18.87 which is a depreciation on last week, and thanks in the main to a stronger dollar (R18.68, R18.99, R18.76, R18.72, R19.15 ,R19.30, R18.97, R19.03, R18.80,  R18.78, R19.03).

The Rand/Pound is  down again at R23.84 (R23.61, R23.93, R23.90, R24.06, R24.18, R24.47, R23.61, R24.03, R23.87, R23.86, R24.15.)

The Rand/Euro closed the week better at R20.11 (R20.25, R20.56, R20.43, R20.47, R20.71, R20.93 R20.38, R20.51, R20.38, R20.40, R20.72.)

Brent Crude: Brent closed the stable $90.15 ($90.87, $86.58, $85.33, $81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33).

Bitcoin was down a touch again at $67,412 ($68,804, $64,681, $69,078, $68,340, $62,315, $54,649, $52,510, $47,195, $ 42,897, $41,608, $41,680).

Articles and Blogs: 
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The NHI and what do do about it 
New-Normal for Retirement? 
Locking-In Interest rates – The inflation story
Situs – The Myths and Reality
Tax Residency – New Rules new headaches Are retirement annuities dead 
A new look at retirement
Offshore investing – an unpopular opinion

Cobie Legrange and Dawn Ridler, 
Rexsolom Invest, Licensed FSP 45521.